Many on Fed want further jobs improvement before tapering QE

Fed officials met before the Labor Department’s jobs report for the month of June exceeded expectations, with the economy adding 195,000 jobs and the unemployment rate unchanged at 7.6%.

The July 5 report reinforced speculation the Fed may reduce its pace of purchases as soon as September. Economists at Goldman Sachs Group Inc. and JPMorgan Chase & Co. said after release of the employment data that the Fed will begin tapering its purchases sooner than they had projected.

Bernanke said tapering depends on whether the economy strengthens in the second half of 2013 and aligns with central bank forecasts released at the end of the June FOMC meeting. The predictions are sunnier than those of Wall Street.

Fed officials predict the economy will grow 2.3% to 2.6% this year and 3% to 3.5% in 2014, while the median estimate of economists in a Bloomberg survey is for 1.9% growth in 2013 and 2.7% in 2014.

Budget Cuts

Tax increases and automatic federal budget cuts are inhibiting growth this year. Those cuts led to furloughs of the U.S. military’s civilian workers that began this week. The move means a reduction equivalent to 11 days pay for as many as 651,542 employees through Sept. 30, according to Pentagon figures. The furloughs are the latest step in automatic budget cuts, known as sequestration.

Growth in the U.S. was less than originally estimated in the first quarter of the year after an increase in the U.S. payroll tax took a bigger bite out of consumer spending than previously calculated in Department of Commerce reports. The economy grew 1.8% in the first quarter, down from a prior reading of 2.4%, according to a June 26 report.

At the same time, policy makers including Bernanke and Dudley have remarked about how a housing rebound is aiding the expansion. Home values in 20 U.S. cities rose 12.1% in the year through April, the biggest annual gain since 2006, according to an S&P/Case-Shiller index. Sales of new houses in May climbed to the highest level in almost five years.

The housing recovery will probably continue even as mortgage rates rise, Jeffrey Mezger, the president of KB Home, the best-performing U.S. homebuilder stock this year, said in a June 27 earnings call.

“If the economy continues to expand like it is, I think you’ll see the banks loosen up,” Mezger said. “And so if rates go up a little bit, but underwriting loosens up a bit, I think you’ll see similar demand, if not more. That’s why we’re not troubled by a little uptick in interest rates right now.”